Last updated on January 2nd, 2018 at 12:00 am
Yves Mersch, a member of the European Central Bank executive board, has publicly spoken out against Bitcoin, citing its volatility, lack of wide acceptance, and decentralization as reasons for why Bitcoin is not a viable monetary system to replace the government-controlled, fiat money systems. Naturally, Mersch claims that the only way to achieve sustainable economic growth is by using the Euro, the official currency of the European Union, rather than using any form of decentralized, or what Mersch calls “local,” currencies. He even went as far as to state that the use of “local” currencies by different European regions even stagnated economic growth.
Mersch on Bitcoin volatility:
“However, exchange rate losses can quickly cancel out this advantage. For example, the Bitcoin exchange rate, determined by supply and demand, slumped from €170 to €70 in April 2013 after the Bitcoin exchange temporarily suspended trading and triggered panic selling.”
On lack of acceptance:
“Worldwide, there are probably a maximum of two million Bitcoin users, and only a few thousand businesses and service providers which accept bitcoins. For that reason, bitcoins have also been referred to as a “regional currency of the internet.”
“Further price falls occurred after hacker attacks, when Bitcoins were stolen on several occasions. This happened most recently in February 2014 and led to the winding-up of Mt. Gox. Since the Bitcoin trading platforms are not regulated, 100% losses are also possible. The absence of a clear legal framework also leads to considerable legal uncertainty among Bitcoin users. Although interested parties can very easily download the application for Bitcoin, they neither understand how this payment system works exactly, nor the risks they run when using it.”
Mersch has of course made some of the most elementary mistakes regarding Bitcoin in his criticisms against it. Firstly, regarding Bitcoin’s volatility, the sudden price fluctuations of the price of Bitcoin are in no way an inherent or natural characteristic of this crypto-currency. The reason for its current volatility is its lack of acceptance, another problem cited by Mersch in his attack on Bitcoin– we will discuss this problem later. And obviously a lack of acceptance also is not an inherent or natural characteristic of Bitcoin. The main factor keeping Bitcoin from being widely accepted as the monetary system to replace the current central banking system is the simple fact that Bitcoin is still in its infancy. Mersch is comparing a 5 year old monetary system to a system of central banking and fiat money that has over a century of history backing it up. Clearly it will take some time for Bitcoin, or any crypto-currency, to become as widely accepted as the Euro or the Dollar. However, as Bitcoin does become more widely accepted, the volatility of bitcoin will decline. Currently, one major transaction can significantly alter the price of bitcoin. Once it reaches the point of wide acceptance, however, it will trade just like any other fiat currency. In fact, bitcoin’s purchasing power will be more stable than fiat currency.
This brings us to the second argument that Yves Mersch made against Bitcoin: its lack of acceptance. As mentioned above, this lack of acceptance is not an inherent characteristic of Bitcoin. The lack of wide acceptance comes from the simple fact that it is a very new monetary system. In fact, more and more merchants– both online and in physical stores– are accepting Bitcoin as payment every day. Additionally, new technologies are being developed to allow Bitcoin users to pay in Bitcoin at stores that do not even accept Bitcoin. These technological developments will make it much easier to use Bitcoin as a medium of exchange, thus making it more likely for individuals to start using it as such, which will necessarily lead to more business accepting Bitcoin for payment. The argument that Bitcoin is not a viable medium of exchange due to its lack of acceptance is completely erroneous and illogical. The only way it can become widely accepted is for people to actually accept it. If you refuse to even experiment with it, and encourage others to stay away from it, then of course it won’t become widely accepted. Fortunately, there is an increasing number of people who are beginning to adopt Bitcoin as their alternative monetary system and are ignoring these claims made from the purely self-interested governments.
Lastly, Mersch argue that Bitcoin is dangerous because it is deregulated. Because of this deregulation, Mersch says that “100% losses are… possible.” Yes, they are! And that is a very good thing! Without a safety net, without anyone to bail you out, you have to actually be smart with how you handle your bitcoins. Erecting a system to socialize any losses made on the Bitcoin market will inevitably create moral hazard; people will be wildly reckless and throw their money into any number of crypto-currency related projects without studying and examining them with caution. If the government is going to bail me out when I lose my money, then why should I care about losing my money? The lack of regulation has been the reason for Bitcoin’s explosion in popularity, any regulation would either slow Bitcoin’s growth or reverse it completely. Risk and uncertainty make up the essence of the free market, of innovation and of growth, while regulation and forced “safety” produce economic stagnation and regression. Decentralization is not a flaw of Bitcoin. Decentralization is the sole reason for Bitcoin’s existence.
Yves Mersch clearly has no real understanding of the free market or monetary theory, which is ironic considering the fact that he serves on the executive board of the European Central Bank. The claims made by Mersch against Bitcoin just further reinforces the painfully obvious fact that no centralized monetary institution can produce economic growth better than the free play of the market. In fact, central banks usually make things worse; we can see this reality if we can completely understand the magnitude of the financial disaster that central banks have set us up for. Bitcoin was created to render these centralized institutions irrelevant. The fact that the central banks are scared of them is a very good sign. When Mersch says that Bitcoin is bad for economic growth, he means that Bitcoin threatens the violent monopoly that the European Union has over Europe’s economy, and he is afraid of losing his job and his power.